Part 2 of the May 11th Hearing in SCO v. Novell - Novell's Motion to Dismiss - as text

Monday, June 28 2004 @ 08:33 AM EDT

Here is the second part of the SCO-Novell hearing from May 11, the arguments regarding Novell's Motion to Dismiss.

There are several significant moments, in my view. One is where Novell's attorney, Michael Jacobs, points out to Judge Kimball that any decision made will impact on other cases, such as the IBM case. Judge Kimball seemed to notice that point. I believe it may have influenced him, particularly with respect to the remand issue and even more with respects to the decision not to grant Novell's motion to dismiss with respects to falsity. By his ruling, he makes is impossible for SCO to escape the real question on the table, which isn't slander of title. It's who owns the copyrights? This is the question SCO has been avoiding in all courtrooms, and now they must face it squarely.

A second significant point is when Jacobs says this:

"One of the questions that comes up in this case is, what did SCO get?
Or as Mr. Hatch put it, how is it possible that for the last eight
years parties have been surviving without a copyright dispute arising?
SCO attributes it to a change in management at Novell; we attribute it
to a change of business strategy at SCO, one not contemplated by the
original agreement."

He goes on to address that question, what did SCO get for its money? And what didn't they get, according to Novell? It's by far the clearest explanation of Novell's position that I've seen. Aside from the 5% of the licenses, they got the right to make a merged product:

"What did they get? Well, what they get, if you go ahead to 4.18, is a provision that says development of a merged product."

SCO doesn't respond to that point at all, instead repeating their mantra that they couldn't have spent all those millions just for 5% of the licenses.

Jacobs makes reference to specific sections of the Asset Purchase Agreement, and while he and the judge were using a document with colored paper clips on the relevant sections that Jacobs refers to, which the Novell side had prepared for the hearing, you don't have that advantage. So I've inserted in colored text the relevant language so you can follow along smoothly. Groklaw's Legal Docs page has the APA and its amendments, in the Novell section. The SCO-Novell Asset Purchase Agreement is here, if you want to follow along by having it open simultaneously.

The judge in his Order granted Novell's motion to dismiss with respect to the special damages, giving SCO 30 days to try to come up with an adequately pled document. On the motion to dismiss on falsity, he denied the motion, basically saying that to win such a motion to dismiss, you have to prove that there are absolutely no conceivable set of facts under which SCO could prevail, and he also notes that the law (under Rule 12(b)(6) of the Federal Rules of Civil Procedure) requires him to look at all facts in the light most favorable to the nonmoving party, meaning SCO. "The Federal Rules of Civil Procedure," he writes, "'erect a powerful presumption against rejecting pleadings for failure to state a claim.'" In other words, this was a motion to dismiss the entire case. You don't do that lightly, and you try not to do it unless there is no way the nonmoving party could prevail. He couldn't go that far at this point:

"The court recognizes that in this case there are multiple works potentially at issue because UNIX and UnixWare had many versions and releases and that without specificity as to which copyrighted works and which rights within each copyrighted work were purportedly transferred, the purported assignment may be insufficient under Section 204(a). However, because there are conflicting arguments as to the parties understandings with respect to the agreements, this court cannot conclude as a matter of law at the motion to dismiss stage that the APA as amended is too vague to act as a guidepost as to what rights were transferred. The parties each have their own divergent interpretations of the agreements at issue in this case. However, the court agrees with SCO and concludes that all of these arguments as to the parties' understandings and interpretations of the agreements would more properly be before the court on motions for summary judgment or trial. Drawing all inferences in favor of SCO as this court must do on a motion to dismiss, this court cannot conclude that SCO can present no set of facts that would prove its claim. Accordingly, Novell's motion to dismiss as to SCO's pleading of falsity is denied."

The reason he makes a distinction between a motion to dismiss and summary judgment or trial is, on a motion to dismiss, there is no fact-finding, no testimony. It's decided just on the pleadings. You need to be able to prove as a matter of law, with no salient facts in dispute, that the other side has no case at all. In a summary judgment, the nonmoving party has to present some evidence to prove that it might have a chance if the case goes to trial. When you read the APA and the amendments, did you find it crystal clear? Neither did I. And apparently neither did the judge, who would like to hear a bit more before he reaches a decision that the case gets thrown out in its entirety.

In reading the transcript, I note that SCO's attorney, Brent Hatch, scored a point by latching on to something that Novell's attorney mentioned in his successful effort to portray that the APA wasn't a clear conveyance document, something that the judge writes was persuasive. Jacobs says that he got "new insight into the language of the parties" to the APA every time he read it. Hatch effectively turned that to his benefit by making it sound like Jacobs had meant that he got different meanings every time he read it, whereas he meant merely that his insight grew with each reading. But Hatch says in effect that if it's not clear, and you can get new thoughts every time you read it, then you can hardly dismiss the entire case until it is made clear, by testimony. I believe that is how SCO squeeked by on this motion to dismiss with respects to falsity.

Ironically, however, the very thing that made it possible for SCO to survive the motion to dismiss is also what will make it impossible for them to prevail in the slander of title action. Technically, SCO won the motion to dismiss as to falsity, but it was a Pyrrhic victory if ever there was one, because now they are facing the one thing they have tried since the beginning to avoid, a test of whether they actually own the copyrights they are threatening the world with. If they thought they could win that argument, they would have brought a straightforward copyright infringement action a long time ago, I believe.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

_______________________________

THE SCO GROUP,

Plaintiff,

vs.

NOVELL, INC.,

Defendant.

_______________________________

Case 2:04-CV-139

________________________________

BEFORE THE HONORABLE DALE A. KIMBALL

MAY 11, 2004

REPORTER'S TRANSCRIPT OF PROCEEDINGS

MOTION HEARING

Reported by: KELLY BROWN, HICKEN CSR, RPR, RMR

APPEARANCES

FOR THE PLAINTIFFS:

HATCH, JAMES &DODGE

BY: BRENT O. HATCH

MARK R. CLEMENTS

Attorney at Law

[ address ]

RYAN E. TIBBITS

SCO GROUP

Attorney at Law

[ address ]

FOR THE DEFENDANT:

MORRISON & FOERSTER

BY: MICHAEL A. JACOBS

Attorney at Law

[ address ]

ANDERSON & KARRENBURG

BY: JOHN P. MULLEN

Attorney at Law

[ address ]

SALT LAKE CITY, UTAH, TUESDAY, MAY 11, 2004

* * * * *

[Continuation of hearing transcript, beginning on page 25 of PDF; part 1 is here, the arguments on the motion to remand.]

MR. JACOBS: All right.
Just to set the context, Your Honor, I'm sure you're aware you have
SCO v. IBM.

THE COURT: I am the lucky judge who has that.

MR. JACOBS: You have two of the many SCO cases that are now filed
around the county.

THE COURT: So I've read.

MR. JACOBS: And they're alleging copyright infringement in SCO
v. IBM. So just I want you to have in mind that what you're doing
here may have some bearing on your other case.

I think it would be useful to walk you through the asset purchase
agreement because --

THE COURT: I can solve them both by some ruling here?

MR. JACOBS: Yes. Or at least a lot of both.

I think it would be helpful to walk you through the asset purchase
agreement. I have found that every time I read it, I get a new
insight into the language of the parties. Do you have a copy of the
complaint there with you, the APA? Because I'm going to --

THE COURT: I think I do someplace here.
Here it is. September 1995?

MR. JACOBS: Indeed. And I will try to make sure that I can help
guide you to the right pages. Not all of them are enumerated, so
there may be a little flipping back and forth. If you'd like, I did
take a copy with some clips that divide up Amendment Number 2 and a
couple portions. Would you like to use the one you have?

THE COURT: I'd be happy with any help.

MR. JACOBS: May I approach?

THE COURT: Sure.

MR. JACOBS: So I guess I should start out by saying we wouldn't be
here if there was a document that SCO had adduced or told you they
would adduce that says, "Novell, hereby, transfers the UNIX
copyright to SCO." "Seller, hereby, transfers the UNIX
copyright to buyer." They have not adduced such a writing.

One of the questions that comes up in this case is, what did SCO get?
Or as Mr. Hatch put it, how is it possible that for the last eight
years parties have been surviving without a copyright dispute arising?
SCO attributes it to a change in management at Novell; we attribute it
to a change of business strategy at SCO, one not contemplated by the
original agreement.

Asset purchase agreement, let's start with the recitals. This will be
important because the term business is defined there.

Seller is engaged in the business of developing a line of software
products known as UNIX and UnixWare.

[A. Seller is engaged in the business of developing a line of software
products currently known as Unix and UnixWare, the sale of binary and
source code licenses to various versions of Unix and UnixWare, the
support of such products and the sale of other products which are
directly related to Unix and UnixWare (collectively, the "Business").]

Now let me stop a minute because this gets a little tricky. UNIX, and
particularly UNIX System V Release X or SVRX. UNIX System V Release X
was the unit that Novell itself acquired from AT&T Unit[sic]
System Laboratories, or USL, just a few years before the APA.
UnixWare is a derivative of that, a software program that Novell wrote
to try and make UNIX inter-operate [sic] well with NetWare, Novell's
flagship product.

When we talked about UNIX, we're talking about legacy, a legacy
program and legacy licenses and a business that by the time the asset
purchase agreement, as I'll show you, is from the standpoint of Novell
and the acquirer here essentially static.

In B, the recitals go on to say that certain assets related to the
business are going to be acquired. So they're not going to acquire,
quote, the business, unquote; they're going to acquire certain assets.

[B. The Boards of Directors of each of Seller and Buyer believe it is in
the best interests of each company and their respective stockholders
that Buyer acquire certain of the assets of, and assume certain of the
liabilities of Seller comprising the Business (the "Acquisition").]

And then we get to 1.1(A) down at the bottom of the first page, and
that is the provision of the promise to convey or the promise to
assign, harking back to our distinction between an actual conveyance
or promise to convey, this is a promise to convey.

At closing date, the seller will convey, et cetera, the included
assets - and if you read across to the next page stating rather the
obvious, they're not going to transfer the excluded assets. We're
going to transfer the included assets. We're not going to transfer
the excluded assets.

[1.1 Purchase of Assets
(a) Purchase and Sale of Assets. On the terms and subject to the
conditions set forth in this Agreement, Seller will sell, convey,
transfer, assign and deliver to Buyer and Buyer will purchase and
acquire from Seller on the Closing Date (as defined in Section 1.7), all
of Seller's right, title and interest in and to the assets and
properties of Seller relating to the Business (collectively the
"Assets") identified on Section 1.1 (a) hereto. Notwithstanding the
foregoing, the Assets to be so purchased shall not include those assets
(the "Excluded Assets") set forth on Schedule 1.1 (b):]

Now, we noted in our opening paper, and SCO did not respond to this
point, that there is a document - there is a closing that takes place,
and there's documents in any big transaction like this at a closing.

THE COURT: When you say the opening papers, you mean on the motion to
dismiss.

MR. JACOBS: Correct. One of the earlier footnotes.

So something happens at the closing, and what happens at the closing
is the included assets get transferred, the excluded assets don't.

So now to flip ahead to, I believe, it is the black clip.

THE COURT: Schedule 1.1(A)?

MR. JACOBS: Exactly. And this is - the Schedule 1.1(A) and 1.1(B)
are the schedules referred to in that provision right there I just
pointed you to. And the first line is the line that SCO points to:

All rights and ownership of UNIX and UnixWare.

And that sounds pretty broad. All rights in UNIX and UnixWare. And
they like that language.

Now, if you go to the next page, the page marked Page 34, we're still
in the included assets. We're still in Schedule 1.1(A). And if you
go down to Roman V, there's a heading there for intellectual
properties. So we're still in the included assets. What intellectual
property is being conveyed to SCO in this agreement? And the answer
is a couple trademarks. No copyrights are shown. No patents are
shown. Just a couple trademarks.

[V. Intellectual property - Trademarks UNIX and UnixWare as and to the
extent held by Seller (excluding any compensation Seller receives with
respect of the license granted to X/Open regarding the UNIX trademark).]

All copyrights and trademarks except for the trademark UNIX and
UnixWare.

[Schedule 1.1(b) Excluded Assets (Page 2 of 2)

V. Intellectual Property:

A. All copyrights and trademarks, except for the trademarks UNIX and
UnixWare.

B. All Patents]

So we have a mirror image provisions [sic] here, the excluded assets,
included only - when it comes to IT [sic, presumably IP - ed.], it included UNIX and
UnixWare. The excluded assets include everything. You see all the
patents there, of course, except for the trademark UNIX and UnixWare.
So as of the closing, we're plainly not transferring copyrights, and I
don't think there's any serious dispute about that.

What, then, does SCO get out of this? If they don't get the
copyrights, what do they get? And I want to turn you now to Article 4
of the agreement, because this is where a lot of the interesting
provisions of this agreement come in, and particularly Section 4.16.

So this is the heading SVRX licenses. And as I mentioned, SVRX refers
to the legacy business, UNIX System V, SV, Release X, X standing for
any numeral. And it's important, first of all, in 4.16(A) to see what
SCO doesn't get with respect to UNIX System V Release X, because in
4.16(A), what SCO has with respect to those rights is the right to
administer those legacy licenses remitting 95 percent to Novell and
keeping 5 percent for it.

[4.16 SVRX Licenses.
(a) Following the Closing, Buyer shall administer the collection of all
royalties, fees and other amounts due under all SVRX Licenses (as listed
in detail under item VI of Schedule 1.1(a) hereof and referred to herein
as "SVRX Royalties"). Within 45 days of the end of each fiscal quarter
of Buyer, Buyer shall deliver to Seller or Seller's assignee 100% of any
SVRX Royalties collected in the immediately preceding quarter. Buyer
shall diligently seek to collect all such royalties, funds and other
amounts when due (and shall investigate and perform appropriate auditing
and enforcement under such licenses at Buyer's cost including auditing
two (2) SVRX licensees identified by Seller during each quarter in which
SVRX Royalties are collected). In consideration of such activities
described in the preceding sentence, Seller shall pay to Buyer within 5
days of receipt of SVRX Royalties from Buyer as set forth in the
preceding sentence, an administrative fee equal to 5% of such SVRX
Royalties.]

So right away you start to wonder, well, why would SCO need the
copyright rights, any of the copyright rights in UNIX System V Release
X. And maybe most fundamentally, why would they need any ownership of
UNIX System V Release X in order to carry on that business of
administering the licenses remitting 95 percent to Novell? The answer
is, they don't. They don't need the copyrights to do that. They're
just administering licenses.

Now, as I mentioned, by this time the SVRX business is largely
static. And if you look down at 4.16(C), it says that seller, that's
Novell, is not going to promote the SVRX business. And then if you
look up a sentence at the bottom of 4.16(B), it says the buyer is not
going to make new sales of SVRX without Novell's permission. That
gets amended slightly by amendment Number 1, not at issue here.

They get the right to make some additional licenses to additional
computers for already existing licenses.

[4.16 SVRX Licenses. . . .

(b) Buyer shall not, and shall not have the authority to, amend, modify
or waive any right under or assign any SVRX License without the prior
written consent of Seller. In addition, at Seller's sole discretion and
direction, Buyer shall amend, supplement, modify or waive any rights
under, or shall assign any rights to, any SVRX License to the extent so
directed in any manner or respect by Seller. In the event that Buyer
shall fail to take any such action concerning the SVRX Licenses as
required herein, Seller shall be authorized, and hereby is granted, the
rights to take any action on Buyer's own behalf. Buyer shall not, and
shall have no right to, enter into future licenses or amendments of the
SVRX Licenses, except as may be incidentally involved through its rights
to sell and license the Assets or the Merged Product (as such term is
defined in the proposed Operating Agreement, attached hereto as Exhibit
5.1(c)) or future versions thereof of the Merged Product.

(c) Seller further covenants that immediately following the Closing Date
neither it, nor any of its officers, directors or employees shall (i)
take any material action designed to promote the sale of SVRX products
or (ii) provide material compensation to any employee designed and
intended to incentivize such employee to promote the sale of SVRX
products, except for actions incidental to unrelated business activities
of Seller.]

So when we look at what the agreement does with respect to UNIX System
V Release X, which is the UNIX that is at issue in the slander title [sic]
claim, what we see is that SCO has no reason to have a copyright.

What did they get? Well, what they get, if you go ahead to 4.18, is a
provision that says development of a merged product. And it says in
the second sentence:

Buyer is going to commercial use with commercially reasonable efforts
to complete the merged product.[sic]

[4.18 Development of Merged Product. Following the Closing, Buyer shall
diligently and vigorously market, sell and promote the Business. In
addition, Buyer shall use its commercially reasonable efforts to
complete the Merged Product (as such term is defined in the proposed
Operating Agreement) by a date not later than December 31, 1997 to be
agreed upon by Buyer and Seller. Buyer shall be entitled to modify the
specifications of the Merged Product provided that any modification is
previously reviewed by the Architecture Board described in Section 3(a)
of the proposed Operating Agreement, and (i) does not impact upon the
anticipated migration of Seller's Product to the White Box Product (as
such term is defined in the proposed Operating Agreement).
Notwithstanding the foregoing without the prior written approval of the
Architecture Board, Buyer shall not change the specifications of the
Merged Product such that the Merged Product will not include the
"NetWare Services" specification set forth on Exhibit A of the proposed
Operating Agreement.]

The merged product was basically what this deal was about from
Novell's standpoint. What SCO was going to do was enhance some
additional kinds of UNIX, some additional UNIX flavors for special
kinds of processors or non-special processors, but evolve the UNIX
business, evolve UnixWare in particular, and that's the reference
there to the merged product.

And if you look even further ahead of the agreement, I won't ask you
to jump there now, but it shows that far from remitting 95 percent of
the SVRX to Novell. As to this merged product, where it calls for
other products that are named in there, there's Eiger and White Box
and computeristic terms, as to those products, there's a step down in
royalties.

Here's the interesting question. We alluded to it in our reply
brief. What ownership of copyrights falls out of this arrangement?

Because SCO is developing enhancements, is writing its own code, SCO
does as a matter of copyright law own the copyright rights and the
rights to enforce the copyright rights in the code that it developed.
There is no so-called grant back provision in this agreement itself.
There is another agreement that's referred to here which does have a
licenses back to Novell. It's not at issue today. But the point is,
in terms of copyright ownership, it's not correct to say they didn't
get any copyright ownership. As a matter of copyright law and how
copyright law treats derivative works, they own the code that they
wrote. The code that they are merely taking from Novell and
incorporating that product they don't own, and they have no need to
own.

And that's why even if you look at the required for language in
Amendment Number 2, you come up against a very - you come up against a
stonewall [sic] when you start talking about UNIX System V Release X. There
is no reason under the structure and logic of the asset purchase
agreement for SCO to have acquired ownership rights of anything in
System V Release X, because that wasn't what they were supposed to be
out focusing on in any way.

So Amendment Number 2 gets executed, and that is the green clip. And
Amendment Number 2 adjusts the definition of excluded assets. Now,
this is the kind of quirky way to begin with to try to effect a change
in the structure and logic of the agreement to only modify the
excluded assets, do away with the included assets.

But in any case, having sat down and thought about it a little bit,
what did the parties do? Did they purport to write an amendment that
transferred all intellectual property rights in UNIX to SCO? Did they
purport to transfer all of the intellectual property rights that are
listed in a later exhibit in the agreement to SCO? They didn't do
that. Did they say, all intellectual property rights relate [sic, presumably related - ed.] to the
business, which would have been kind of interesting because they
talked about - they defined the business. There's even, just to
underline the point, there is even a definition of seller intellectual
property rights in the asset purchase agreement at Section 2.10. Did
they say, we are going to transfer seller intellectual property rights
from seller to buyer? They didn't do that.

[2.10. Technology. To the knowledge of Seller, as of the date hereof,
Seller owns, co-owns or is licensed or otherwise entitled to use rights
to all patents, trademarks, trade names, service marks, copyrights, mask
work rights, trade secret rights, and other intellectual property rights
and any applications therefor, and all maskworks, net lists, schematics,
technology, source code, know-how, computer software programs and all
other tangible information or material, that are used in the Business as
currently conducted (the "Seller Intellectual Property Rights").

The Seller Disclosure Schedule lists, as of the date hereof, (i) all
patents, registered copyrights, trademarks, service marks, mask work
rights, and any applications therefor, included in the Seller
Intellectual Property Rights; (ii) the jurisdictions in which each such
Seller Intellectual Property Right has been issued or registered or in
which an application for such issuance and registration has been filed,
including the respective registration or application numbers; and (iii)
which, if any, of such products have been registered for copyright
protection with the United States Copyright Office and any foreign
offices. The Seller Disclosure Schedule also sets forth a list of
license agreements which, to Seller's knowledge, constitutes all license
agreements under which Seller licenses as licensee the intellectual
property rights of third parties relating to technology or software
which is incorporated in existing products of the Business for which
products Seller has received revenues in excess of $2,000,000 in the
twelve-month period ended July 31, 1995. To Seller's knowledge, Seller
is not in material violation of any such license agreement.

With respect to the Business, Seller is not a party to nor is the
Business subject to (i) any joint venture contract or arrangement or any
other agreement that involves a sharing of profits with other persons
other than the payment or receipt of royalties by Seller; (ii) any
agreement pursuant to which Seller was obligated to make payment of
royalties in the twelve-month period ended July 31, 1995 of $1,000,000
or more; or (iii) any agreement pursuant to which Seller utilizes the
intellectual property rights of others in any products currently
marketed by seller and which is either non-perpetual or terminable by
the licensor thereunder in the event of the Acquisition and which, if
terminated, reasonably would be expected to have a material adverse
effect on the Business Condition of the Business.

No claims with respect to the Seller Intellectual Property Rights have
been communicated in writing to Seller (i) to the effect that the
manufacture, sale or use of any product of the Business as now used or
offered by Seller infringes on any copyright, patent, trade secret or
other intellectual property right of a third party or (ii) challenging
the ownership or validity of any of the Seller Intellectual Property
Rights, any or all of which claims reasonably would be expected to have
a material adverse effect on the Business Condition of the Business. To
the knowledge of Seller, as of the date hereof, all patents and
registered trademarks, service marks and registered copyrights held by
Seller in connection with the Business are valid and subsisting except
for failures to be valid and subsisting that reasonably would not be
expected to have a material adverse effect on the Business Condition of
the Business. Seller does not know of any unauthorized use, infringement
or misappropriation of any of the Seller Intellectual Property Rights by
any third party that reasonably would be expected to have a material
adverse effect on the Business Condition of the Business.]

They said something very narrow and very limited. All copyrights and
trademarks - so actually to start out with, a very interesting point.
We retain the exclusion for all copyrights and trademarks. We don't
wipe it away. We say, all copyrights and trademarks except for the
copyrights and trademarks owned by Novell as of the date of the
agreement required for SCO to exercise its rights with respect to the
acquisition of UNIX and UnixWare technology.

None of us were present in that negotiation. Section 204(A) says it
doesn't matter. You look to the plain language if the document, and
you have to cross over that 204(a) bridge, and you have to see a
conveyance. You have to see an assignment. You have to see something
that says something along the lines of, seller hereby conveys to
buyer.

But even if you start penetrating this language, you see why SCO's
claim just cannot survive a motion to dismiss, because under 204(a),
we should know what copyright rights went to SCO. And as I mentioned
when I discussed the structure and logic of the Copyright Act, it's
not just what rights and what programs or what rights and what
manuals, but Section 201 makes it clear that you can transfer any one
or more of the exclusive rights volume within copyright. The right to
reproduce, the right to distribute, the right to publicly perform.
And then even in that you can convey sub-divisible rights.

So we should know - from the face of the document, we should have a
guidepost that says the cases, what programs, what exclusive rights,
can't assume that it's all exclusive rights, here especially since it
says required for. And that's why this is - this Amendment Number 2,
amendment to the APA fails two tests under the law of 204(A). One, is
it an instrument of conveyance? Meaning that it had the effect of
conveying a present interest in an item of property; and, two, is it
close enough so that we're not left completely guessing as to what
copyright rights might have - might, in fact, have transferred to
Novell - from Novell to SCO, assuming that this was such an instrument
of conveyance?

But their slander of title claim depends on their ability to show that
a transfer of ownership occurred because, as Mr. Hatch noted, they have
attached these documents to their complaint. These are their
documents. They haven't told you how they might amend. They haven't
told you what they might show by way of additional written instruments
of conveyance.

We submit that you should dismiss this complaint. And if they want to
try and change your mind later with some additional evidence, they
will have to file a relevant motion.

I just want to note two - one housekeeping item. The cases we cite on
204(a) and on jurisdiction refer to 1338, and the issue of
jurisdiction should be considered as a 1338 issue. And secondly, on
the - you've dealt with this issue of special damages. I think you're
the expert of special damages under Utah law. And your decision on
that was affirmed.

They have plead special damages with serious particularity, and they
have to prove - they can't just plead attorney's fees in this action
as the basis for their special damages. You decided that in the
Computerized Thermal Imaging case. It was affirmed by the 10th
circuit. So on the issue of special damages, I think that is a really
fairly clear question of law.

THE COURT: Thank you, Mr. Jacobs.

Mr. Hatch?

MR. HATCH: You know, Your Honor, I think, and I hope I get it right
this time, I think he's putting the cart before the horse. How's that?

As I sat and listened to Mr. Jacobs, I think this would all -- it would
all be good and well if he were making those types of arguments, you
know, several months from now, particularly as he's trying to go
through the contract and tell you what he thinks it means, after we've
had the discovery and we've talked to the people who are involved, we
have all the documents out there.

We have to remember, this is a motion to dismiss. We're talking about
the pleading, not all the documents out there. And to be honest with
you, as you can probably well guess, I have rather divergent views of
the documents as to what they say and what Mr. Jacobs says.

One of the things he does tell you, I think he started his argument by
saying this, and I think it says volumes, he said every time I read
the APA, I get something new and different. And, you know, we ought
not to be sitting here on a motion to dismiss when the only thing
before this Court is a complaint and having Mr. Jacobs, who apparently
gets different readings every time he reads it, telling us what this
contract means.

The reality is all we're here to decide today is whether or not we
sufficiently pled in the pleading the statute of slander of title
claims and whether we can go forward. And he is trying to put his
defense that somehow he thinks the contract, he may be able to show
that it means something different than we say it is, he wants to do
that now. He wants you to decide that issue now, without the benefit
of all the documents, all the correspondence, the witnesses that are
involved in this, and frankly without a real knowledge of the
contract. You know, he's gone up and made representations that were
really quite amazing, because the contract itself, as he tried to show
it to you, he asked a very interesting question. He pointed out that
part of this was - the duty was SCO was to administer current licenses
and remit a percentage back to Novell. And that doesn't - why would
that require any copyright?

Well, okay. That's really wonderful and probably true. But, you
know, a lot of money was paid for this, and not enough money that
could be justified from just that part of the contract. He leaves out
the entire rest of the contract including from the list of assets
where the source code is being transferred to SCO. And it's with the
source code that we have the ability to use that source code, to
develop new products under the source code, new licenses and to be
able to take the business forward. That is worth something. In the
source code without a copyright isn't worth anything. And if we don't
decide it's a vacuum today on a motion to dismiss and go forward, I
think Mr. Jacobs knows very well just as he really - well, he knows
that we're going to find several things. We're going to find that
Novell transferred copyrights to us at the time of closing. Well, why
did they do that if his reading is correct?

One of the documents - and this is a motion to dismiss, but I think
it's only fair for the Court to see the kind of things we're going to
need to be looking at as we go forward. One of the documents that is
dated December 6, 1995, now that's the date of closing. That's a date
where they're claiming no transfer was made. It is a technology
licensing agreement between Novell and SCO. And essentially what it
does is it gives Novell a license back of the copyrights and all the
rights and everything it just sold to SCO for it's own use.

Well, if this were a summary judgment motion, we'd be asking serious
of [sic] questions of, if you're saying copyrights weren't transferred,
why did you feel like you needed to get a license back so that you
could use these in your own business? Because if you owned them,
guess what, this document doesn't exist. And that's kind of why he
wants you to decide this on a motion to dismiss and impact, you know,
the other case you have and impact this case without any information,
because well, that would be a really great victory.

But it really goes contrary to the law of the motion to dismiss.
We're here. Our only concern here is whether or not it was pled
sufficiently and, therefore, put on notice of their claims so we can
go forward and resolve the dispute, which is a state law claim on
whether or not they've slandered our title, which we allege they have;
and , two, whether their defense, which seems to be created not back
in 1995 when this thing was closed or even '96 when the clarification
of the Amendment 2 was put into place, but just a few, not more than a
few months ago when the new management started to take positions that,
you know, we frankly believe were taken to affect the IBM litigation.

THE COURT: What is your response to Mr. Jacobs' argument that you
haven't sufficiently pled special damages and that you have not met
the brilliant [sic] test for them outlined in Thermal Energy?

MR. HATCH: I would say that, Your Honor, if we haven't met it as well
as you would expect, my most profound apologies, because I wouldn't
challenge that ruling at all. What I would say, again, we're in the
notice of pleading stage, and it's very - we have alleged, and I'm
always - I'm always willing to say we could have alleged better. I
think anybody who takes a second grasp of something can always write
something better. But I think it is sufficient.

They are on knowledge that based on what they did that they know that
people - they know the intent of the people - there are people out
there and businesses who will not take licenses with us now because
thay have raised an issue whether or not we own the copyright or not.
That's a damage, and that's a type of damage that you talk about in
that position - I mean that opinion in its typed form, not the exact.
They know that people won't invest with the company because there's a
question mark out there that they caused. And, frankly, we're having,
you know, we're having impact that's not monetary, as well, because
people were citing to this case and other cases saying, we ought to
state them, ought to go forward where we can protect their rights
because they want to see if they can actually make their case that we
don't own the copyright.

So those are all pled generally. Could we be more specific? Always.
Could we be more specific in six months when we have more discovery?
Probably. But I don't think the Notice Pleading Statute requires
that. If there was no possibility that we had any type of special
damages under the claim, then I would say there's a problem. But I
would say it's pretty obvious, and they know it, that there are claims
for damages out there, and having us put another paragraph in the
complaint would really -- it could be done, but it's really kind of a
waste of time and manpower. The case ought to move forward. And,
frankly, even if there had only been a monetary damage, the fact that
we had to expend attorney's fees to protect our rights is a legitimate
damage under the case law, as well.

The only other point I would make, and it goes really to the same
point that I was making about, you know, really what Novell was trying
to argue here is a motion to dismiss is their interpretation of the
contract. I heard Mr. Jacobs talk about, you know, you have main
parts and subparts and got into a rather quite complexity that he
claims the law of 204(A) requires. I would put to you and I have yet
to see the case that requires all of that.

Judge Kazinski was very clear in his decision in the Ninth Circuit, a
juris [sic - presumably jurist - ed.] that I personally have respect for, bright man. He stated the
same thing that Judge Friendly stated and Judge Newman before stated,
virtually every judge that addressed it, it needs to be a wriiting.
And, he says, it does not need to be the Magna Charta [sic]. And the
reallity is here, there isn't a lot of detail in the contract.

But one of the things that they're trying to attach their
interpretation to this is, is we will show at trial if they bring
summary judgment, at summary judgment, that what was being transferred here was everything
that was UNIX and UnixWare. And the only - and it doesn't take a lot
of language to say, everything is being transferred.

And Novell knew that. And we believe that not only will the SCO side
of that contract testify that we were buying everything in UNIX and
UnixWare, which doesn't take a delineation, but that the Novell people
are going to testify to that, too, because that's what the deal was.
And so we have every belief that they will be consistent with that
testimony.

Now, one of the things that he doesn't point out, it's hard to define
this. But you'll notice in the excluded assets, the reason it even
makes any limitation at all is because Novell at the time was
concerned that one thing didn't get transferred over, and that was
their NetWare product. And that's why it's worded. It goes all the
way down the list. You don't get NetWare. You don't get NetWare
this, and you don't get NetWare that. And when it talks about you
don't get copyrights in 1.1(A), it's talking about we're not getting
the NetWare copyrights.

Now, all of this is going to be made clear throughout the couse of
this litigation, and it would be truly unfortunate if a motion to
dismiss based on a lawyer's argument that he gets a different reading
every time he reads it, we throw the entire case out. That doesn't
make sense.

And I think they understand the pleadings under the Notice of
Pleadings standard. And I really wouldn't - could the pleading be
made better? Maybe. But it wouldn't - would their knowledge of what
they're defending be any better because of it being written slightly
better? I don't think so, and I think we ought to move on.

Thank you, your Honor.

THE COURT: Thank you, Mr. Hatch.

Mr. Jacobs?

MR. JACOBS: Briefly, Your Honor.

We read Section 204(a) as saying that SCO doesn't get to get to the
jury. The policy behind the 204(a) is there should be clarity in
instrument of assignment so that both parties and the world can trace
title. We don't have a deed system, although you can record
assignments in the copyright office. We don't have the kind of
elaborate system of land title that we have in this country to make
sure -- to ensure certainty. And, of course, there are disputes that
arise out of the real property deeds. But you have to start out with
a deed. You have to start out with an instrument of conveyance.

I'm studying the assets purchase agreement to answer the question,
what did SCO get? I started out by saying we wouldn't be here if SCO
could point to an instrument of conveyance.

They haven't pointed to an instrument of conveyance. They haven't
pointed to a document in which Novell conveyed ownership of copyrights
to seller - when seller conveyed ownership of copyrights to buyer,
when Novell to SCO. If they had that piece of paper in front of you,
could there be interpretive issues? Perhaps. If they did it right?
No. But could there be interpretive issues? Perhaps. But at least we
would know that there was some actual conveyance of something to
something, and they haven't even gone that far.

So by suggesting to you that what they really need to do is take
discovery and get to the jury, we propose to you that they're really
making our argument. They're making our 204(a) policy argument.
They're making our 204(a) case law argument.

The instrument of conveyance is supposed to serve as the guidepost.
It's supposed to be sufficiently clear that the world and the parties
know that the buyer is actually negotiated. [sic] One of the cases says
that the purpose of 204(a) is to ensure buyers negotiate specifically
with sellers over what copyrights are being transferred. And if you
stretch that law very far and you allow people to say, let me get to
the jury and let me introduce evidence from a former executive that
now works for us, then you undermine the policy behind 204(a). You
undermine the entire federal scheme. That's why you should dismiss
their complaint.

THE COURT: Thank you.

Thank you all. I'll take this motion under advisement and reach it if
I don't remand the case.

Court will be in recess.

(Whereupon, the court proceedings were concluded.)

* * * * *

STATE OF UTAH

ss.

COUNTY OF SALT LAKE

I, KELLY BROWN HICKEN, do hereby certify that I am a certified court
reporter for the State of Utah;

That as such reporter, I attended the hearing of the foregoing matter
on May 11, 2004, and thereat reported in Stenotype all of the
testimony and proceedings had, and caused said notes to be transcribed
into typewriting; and the foregoing pages number from 3 through 45
constitute a full, true and correct report of the same.

That I am not kin to any of the parties and have no interest in the
outcome of the matter;